I am both a Realtor as well as a Certified Residential
Appraiser. While I assist both buyers
and sellers with the purchase or sale or real estate, I also have many clients that
hire me to perform appraisals on residential property. I am often asked how an Appraiser determines
the value of a property. Frankly, that
is a very good, and simple, question.
Our homes tend to be our biggest investments so it does not surprise me that
there are a large number of people and clients that are very curious about the
process of determining the value of their home.
Unbeknownst to most, there are many different appraisal
products. The most common report is the
uniform residential appraisal report that is used for banks and mortgage
companies when we borrower against property for the purposes of obtaining a
purchase money mortgage or when refinancing real estate that we already own. Interestingly, there are numerous other
products that appraisers utilize for different purposes. When we were in the recession back in
2008-2011 approximately, the great majority of appraisals completed during that
time were either REO (Real Estate Owned) Appraisals for banks when they were
foreclosing on homes or standard market value appraisals to help lender’s
determine the value of property that
they were considering for a short sale transaction. To rewind quickly, an REO property is a
property that a bank has foreclosed upon and now owns as a result of that
foreclosure process. Once the bank
forecloses on the property, they now need to market and sell the property so
they first and foremost hire a Licensed or Certified Appraiser to complete an
appraisal on that property so they know what it is worth and have an idea of
what they can market and sell it for. A
short sale is when a borrower goes to their lender and asks them if they can
sell the property for less than what the mortgage amount and if that lender is
willing to forgive the deficiency, or the variation between what the home is
worth and the mortgage balance. REO’s
and Short Sales were very common for some time and are now much less common with
the improved market conditions.
Other appraisal products are used to determine the value of
property for estate purposes, in divorce, bankruptcy, and for Realtors when
attempting to list or sell a home. This
last product is something that I find valuable to my Realtor clients and
friends because I provide for them a unique and specialized perspective on the market,
being that I too am a Realtor as well as an Appraiser. But again, it is a slightly different
appraisal product than some of the others mentioned. There are full appraisal products that
require an inspection of the property, there are exterior only appraisals that
can be completed with just a view of the property from the street, and there
are also desktop products where the value of a property is determining strictly
based upon data without visiting the property.
Now, to get to the main point and question – how is value
determined. To answer, I am going to
provide a simple example using a standard home in a standard type subdivision
of fairly similar homes. This will help
with understanding the process as it becomes increasingly complicated when
dealing with more unique properties in more unique market areas, although the
methods applied are similar.
A standard bank appraisal will require three recently sold
comparable properties as well as at least one or two pending or active listing
comparables. When I say comparables,
what I mean is a similar home that sold recently nearby. The similarities that I am looking for are
age, size or square footage, bed/bath count, features such as garages and
pools, lot size, similar design, and lot location. As far as the timing of the recent sales,
lenders typically require that one or two of the sales has occurred within the
prior 90 day period and no older than 6 months prior. For distance, the standard for most metro areas
is sales within a one mile radius. The
best comparable would a home that just recently sold, perhaps on the same
street or within the same subdivision that is the same age and size, with
similar amenities and features. Another important
factor when considering a comparable sale is condition and level of
upgrades.
All of these factors mentioned are considered when
determining which comparables to use within the appraisal report. In metro areas that are very active like Phoenix
and Scottsdale, it tends to be easier to locate good comparables to use within
the report. Once we have determined
which comparables would be best for our report, we proceed with making
adjustments for differences between the subject property, which is the home
that we are appraising, and the comparables.
The better the comparable, the less adjustments required.
When appraising more unique properties such as large estates
in Paradise Valley for example, the parameters and complexities grow
significantly. Also when appraising
rural properties on the outskirts of the city, it can be difficult to locate
similar and recent sales nearby, therefore the parameters are expanded.
Once all of the comparable data is put together within the
report, we can begin to determine what the value of our subject property. Appraisers also look at what the local market
is doing in terms of appreciation, depreciation, sales volume, external
economic trends, and environmental influences.
All of this information and data is considered when determining the final
value estimate of our subject property.
This approach to determining value is known as the sales comparison
approach, or the market approach. This
is the most common and effective means to determining value for residential
property. There are a couple other methods
that are sometimes considered – the cost approach which utilizes construction
data to determine the value of reproducing or replacing the improvements and
the income capitalization approach which considers income that a property may
generate to assist in determining its value.
I enjoy the process of determining a property’s value very
much. It includes visiting and
inspecting the home, measuring it to determine its square footage, and driving
the neighborhood. Once the physical
inspection is completed, then it’s back to the office to analyze the data and
put the report together. A typical residential
appraisal, with some pre-printed forms along with all of the added data,
photographs, charts, and sketches can easily exceed 30 or 40 pages and can take
anywhere from 3-5 hours to complete.
Value is always changing.
A home that I appraise today will likely have a different value in six
months or a year. Property value can
change daily depending upon economic and environmental factors. As such, an appraisal, or determination of
value, is a product and service that will always be needed.
